Insurance Contracts CP - Law Reform Commission

―It is easy to sympathise with the consumer assured who has made an innocent error in
making a statement about an existing or past fact in a proposal, who then forgets about it all
and thinks he is insured and then suffers a loss which is not paid because the fact was not true
and it is treated as a ―warranty‖. But I must admit to having less sympathy for the business
assured, who, in his own business, may well demand exact compliance with contract terms
with its counterparty, whether it be as to description of goods, date of shipment or the
documents to be produced to entitle payment on a letter of credit. If business people wish to
insure the wherewithal of their businesses, can it not be said that they ought to make
themselves as aware of the consequences of their actions (or inactions) as they would do for
their own speciality? That was how the rule as to breach of warranties was defended when it
was first introduced and one asks whether businesses are, generally speaking, less robust now
than they were in 1980.‖ 131
5.79 The Commission provisionally recommends that where the insured establishes that there is no
causal link between the failure to observe a promissory warranty and the loss the insured should be able
to recover on the claim; and the Commission invites submissions as to whether the failure to observe a
promissory warranty will only lead to the contract being invalidated where the insured has acted
fraudulently (intentionally or recklessly). This provisional recommendation should apply to all insurance
contracts within the terms of the Financial Services Ombudsman jurisdiction, even if the dispute comes
before the courts. In relation to other insurance contracts the Commission invites submissions on
whether a provision of this kind should serve as a default rule in commercial insurance contracts
generally.
(2) Precautionary Measures under the PEICL and Promissory Warranties
5.80 The decision in Bennett v Axa Insurance Plc 132 suggests that individual insurers may be
prepared to allow a policy to require that promissory conditions should be linked to the events that
occasioned the loss. The case also shows that promissory warranties can remain draconian in their
consequences. A pizza restaurant covered by an all risks policy was destroyed by fire after closing one
evening. The insurer sought to avoid the claim by relying on a ―waste clause‖ whereby the insured
warranted that ―trade waste‖ would be removed from the premises at the end of each days trading. Some
materials, including cigarette butts and paper napkins, were, the court found, likely to have been left in
metal bins and thus created the source of the fire. The insurer did not rely upon a clause requiring the
insured to take reasonable precautions to prevent the loss (apparently conceding any defence centring on
negligence would fail), and even though the policy behind the waste clause:
―could perhaps be more clearly advertised or enunciated, the waste clause was effective. In a
plea ad misericordiam in his final reply [the claimant‘s counsel], suggested that the Claimant
had complied with the spirit of the policy, although he was in fact unaware of the existence of
the warranty, that the Defendant underwriters were relying upon a technicality and that it was
unjust that someone who was as the Claimant was running a tight ship should in such
circumstances be denied an indemnity by his underwriters. The plea serves only to
demonstrate how uncertain a guide is sentiment in determining a claim of the sort which is
before me. Naturally I have great sympathy for the Claimant, an honest businessman who
finds himself without insurance cover notwithstanding his evidence as to the measures he took
to put into place a proper system designed to ensure the tidiness and cleanliness of the
premises was unchallenged. That is no doubt why the insurers did not suggest that the
insured had failed to take reasonable precautions to prevent the loss and damage which in fact
occurred. Sympathy for a large corporate insurer is less obviously felt, but by inclusion of the
waste clause in their policy these insurers made clear that payment of a claim in circumstances
such as I have been compelled to find here existed was not the bargain which they made.
Warranties in an insurance policy are draconian in their effect … It is not altogether surprising
131
132
Ibid p.118.
[2003] EWHC 86 (Comm).
130